Retail Looking Good for 2018

A lot has happened in a year. Our forecast article for retail in 2017 indicated that the fundamentals of a good economic recovery in the U.S. retail sector had taken root and retail was well positioned. However, there was also reason to be cautious, due to the recent U.S. election of President Trump, the uncertainties of his policies and the change of government.

At that time, the Dow Industrial Average on the New York Stock Exchange was on the verge of reaching 20,000 points for the first time in history. As of the time of the writing of this Article, the Dow is now over 25,800. In the year since the election, other stock indices have also significantly increased. It is unlikely that there has ever been such a dramatic increase in the stock market over such a short period of time. Other core fundamentals necessary for retail growth have also continued to remain strong. Unemployment remains low (although some question whether job growth is slowing). The cost of capital remains relatively low and funds are available. Consumer confidence is high. Inflation remains in check. Fuel costs are relatively low. And, consumers appear to be spending.

Another factor that may provide an assist to growth in the retail sector is the recent passage of the Republican Tax Cuts and Job Act (the “Act”), which goes into effect in 2018. Generally, the Act will significantly cut the corporate tax rates and provide tax relief to the middle class (at least temporarily) and others. If the Act works as intended, companies, including retail companies, should invest more in their businesses and employees in the U.S. In addition, taxpayers should have more discretionary income available (from tax savings) to spend, including in the retail sector. Notwithstanding, it remains to be seen whether or not the Act will produce its intended results.

Holiday Sales and Other Indicators of Growth

As we have indicated in past articles, recent prior performance of the economy and holiday sales is often an indicator of retail performance in the ensuing year. If we look at the economy coming out of 2017 and the 2017 holiday sales reports, then 2018 looks to be a promising year for retail.

Leading into the holiday sales period, the economic news was good. According to reports in Chain Store Age and Commercial Property Executive, retail sales in October rose over September last year between 1% and 5%. In addition, year-over-year retail sales were up for November between 4.3% and 5.8%.

In addition, holiday sales did not disappoint. According to a recent CoStar.com article, “MasterCard reported that holiday sales increased 4.9% this year, setting a new record for dollars spent by shoppers, the largest year-over-year increase since 2011.” This increase was more than predicted by many commentators. According to an article by Chain Store Age, Sarah Quinlan (Senior Vice President of Market Insights for MasterCard) said “[w]hen we look at holiday spending, it’s easy to see that 2017 will likely be a good year for retailers…. Unemployment is at 4.1%, wages are rising, consumers are confident. It is all playing out in the shopping picture this holiday season as retailers and gift recipients would want it to.”

Consumer Confidence

Virtually all of the well-known consumer confidence gauges for the U.S. economy are currently at their highest levels in recent history.

According to a recent Commercial Property Executive article, “… the University of Michigan … index of consumer confidence experienced a minor decline in December, with the December figure just below the average for 2017 (95.9 versus 96.8). [However, this should not be overshadowed by the consistent recent rise in confidence, and the current very high confidence level.] In fact, the average for all of 2017 was the highest since 2000, and only during the long expansions of the 1960s and ‘90s was confidence significantly higher.”

Similarly, in a recent ABC News article, it was reported that “[c]onsumer confidence hit 122.1 in December [2017], slightly below the 17-year high set in November [2017 of] 128.6, according to the Conference Board’s index…. Despite the [slight] decline in confidence, consumers’ expectations remain at historically strong levels, suggesting economic growth will continue well into 2018, Lynn Franco, Director of Economic Indicators at the Conference Board, said in a statement.”

Citing the strong consumer confidence figures and their 17-year highs, Matthew Shay (Chief Executive of the National Retail Federation), was quoted in a recent Washington Post article as saying “[t]he fundamentals of the economy remain strong…. Things are setting up very well for a very strong finale to the year.”

Consumer confidence is a fundamental factor in any economic forecast. With high levels of consumer confidence, coupled with low unemployment and other positive economic factors (such as the robust stock market, continued low interest rates and low fuel costs), the indicators look good for the near future in retail.

However, despite the statistics on confidence, there may be reason to be cautious. According to a November 20, 2017 Washington Post article, “there are signs the optimism may be limited to high-income Americans. Data show … in many cases [the] economic outlook [for lower income households] isn’t as rosy as it was earlier this year. Wages have remained largely stagnant, particularly in lower paying jobs, and many are on edge over news reports suggesting changing tax policies will disproportionately hurt lower- and middle-income families….” To the extent these issues are accurate and manifest themselves into significant problems for the economy, confidence can quickly dwindle.

Trends and Concerns

Although the metrics indicate that 2017 was a good and productive year for retail and that 2018 is poised to grow that success, there were some counter trends in 2017 (and prior) for developers and retailers to manage. 2017 continued to see significant store closings and retail bankruptcies. Of particular significance, the year saw a lot of department store closings, causing great difficulties for regional mall owners. Owners have had to be creative to replace these tenants. In most cases, department store buildings have had to be re-tenanted with multiple tenants or their buildings have had to be entirely re-purposed.

However, it should also be noted that according to a recent National Retail Federation report, there was a “net increase of 4,000 store openings projected for 2017. For every closing, there are 2.7 openings. What is different today is that the stores that are flourishing are the ones which are willing to shed the old skin of traditional retail and embrace a newer model."

Retailers are adapting to changes in the retail landscape. Many of these changes are being caused by e-commerce and the fact that many consumers either shop at home or comparison shop on the internet from the store. Therefore, what we have found is that many new stores are smaller (requiring smaller footprints) and are more highly targeted to specific demographics. These stores are able to sell both from their brick and mortar locations and from their websites (they offer so-called “omni-channel” service). Omni-channel service appears to be something that most modernized retailers are striving to perfect.

On the flip side, we are also seeing some traditionally on-line retailers starting to get into the brick-and-mortar business. With Amazon’s recent purchase of Whole Foods and its openings of Amazon book stores scattered throughout the country, it appears that even the largest on-line retailer sees the benefit of in-person shopping. We see this trend continuing to develop.

Another trend that we see continuing is the growth of experiential types of operators occupying space in retail projects. These operators provide experiences that cannot be duplicated online. Thus, as has been the case in the last few years, we expect to see leases in 2018 to more restaurants, theaters, fitness and health clubs, and other types of uses that involve a customer’s presence. As retail centers become more dependent on these types of retailers, the uses become more and more creative and unique.

Finally, although the retail sector is performing well (and looks to perform well into 2018), the situation can change dramatically based on political and/or world events. Some believe the present state of politics in the U.S. to be unstable and unpredictable. To the extent there is a significant shift in the political stance of the U.S. vis-à-vis its trade policies, its support for allies, nationalism, confrontation with another country, internal party changes by way of the mid-term elections, or a host of other possibilities, these changes could significantly impact the stock market, the U.S. economy and retail negatively.

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The core fundamentals for continuing a strong retail recovery into 2018 appear good. The overall economy appears strong, the stock markets are at all-time highs, unemployment and interest rates continue to remain low and consumer confidence is high. So long as we do not experience the unexpected, retail should be in for a good year.